UK: CRC is here!

Last Updated: 14 June 2010

Having been trailed for over 2 years, the CRC (Carbon Reduction Commitment) Energy Efficiency Scheme, the new "cap and trade" emissions trading scheme, is now here. "[The] new rules ... will pitch some of the UK's largest organisations against each other in a drive to cut carbon dioxide (CO2) emissions. The CRC scheme will include household names such as Sainsbury's, Tesco, Marks & Spencer, John Lewis, Royal Bank of Scotland, Hilton and Marriott. These businesses will be ranked, according to reductions in energy use and improvements in energy efficiency, alongside public sector organisations such as NHS trusts, local authorities and government departments." - The Scottish Environmental Protection Agency (SEPA).

Who is affected?

The Scheme affects around 20,000 public and private organisations which during 2008 had at least one half hourly meter (HHM) settled on the half hourly market. The types of organisations covered include the household names mentioned above, joint ventures, PFIs, PPPs and franchises, schools and universities. The legislation implementing the Scheme, the CRC Energy Efficiency Scheme Order 2010, also provides that central government departments must participate in the Scheme.

Where companies form part of a group, for the purposes of the Scheme, the group must register as a single participant and measure its consumption of energy across all of the companies in the group. The parent company or nominated other will be held responsible for reporting and purchasing allowances for all of the companies in the group.

If the group of companies contains a large subsidiary (Significant Group Undertaking) which may qualify alone for the CRC, it may be "disaggregated" from the group and participate in the Scheme alone.

Going forward, organisations will have to consider how changes to their group structures affect their responsibilities under the CRC Scheme.

What must participants do?

The extent of participation in the Scheme for the 20,000 organisations affected will depend on how much electricity they consumed in 2008. All the organisations will be required to disclose information relating to their energy consumption, but for now, only around 5,000 organisations will have to purchase allowances. All qualifying organisations must:

  • Register - the organisations which had at least one HHM in 2008 must register for the Scheme at the CRC Registry before 30 September. Note, Significant Group Undertakings must register by 30 June 2010. The CRC Registry is now open for applications: http://www.environment-agency.gov.uk/business/topics/pollution/98263.aspx
  • Monitor consumption - from April 2010 until March 2011, qualifying organisations will have to monitor, record and add up all energy supply consumed across the organisation including electricity, gas, and any other fuels such as coal, diesel and LPG (travel consumption of fuel is excluded from the Scheme). This first year will be known as the footprint year of this phase.
  • Submit report - having collected the energy consumption figures, the organisation will have to compile and submit a "Footprint Report" to SEPA.

From April 2011, those organisations whose electricity supply through all HHMs was at least 6000 Megawatt hours during 2008 (resulting in an electricity bill of approx £500,000)will also be required to

  • Purchase allowances - to "offset" the energy consumed and surrender one allowance for each tonne of CO2 they emit during the relevant annual reporting year.

How much will it cost?

In the introductory phase, the allowances must be purchased from the Government at a cost £12 each. From April 2013, the number of allowances available to purchase will be capped and will have to be purchased at auctions held at the beginning of each compliance year. The Financial Times reported recently that CRC could cost Land Securities around £3m in the initial phase and that cost could rise to £6m with the introduction of the auctioning of allowances from April 2013 onwards.

Who polices CRC?

The Environment Agency is the lead UK administrator for the scheme and will run the CRC registry. In Scotland, the Scheme will be audited and enforced by SEPA.

What are the penalties for non-compliance?

There are a number of financial penalties which will be imposed on failure to comply with the demands of the Scheme as follows:

  • failure to register - £5,000 + £500 per day (maximum 80 days after due date)
  • failure to disclose information - £500 per settled half-hour meter
  • failure to provide annual report - £5,000 + £500 per day (maximum 40 days after due date) or £40,000 (more than 40 days late or not provided)
  • failure to surrender allowances - £40/t CO2 for emissions comprising the shortfall
  • inaccurate reporting - £40/tCO2 for emissions incorrectly reported

Criminal penalties of a maximum fine of £50,000 and up to 2 years imprisonment may be imposed for falsification, deception and non-compliance with enforcement. Publication is also noted as being a penalty for non-compliance, ie naming and shaming of offending parties.

What are the incentives for improving energy efficiency?

The idea of the CRC Scheme is to encourage participants to be more efficient with their energy consumption and performance tables will be published showing how well undertakings have performed. Those organisations which perform well and do not use up all of their allowances will be entitled to a recycling payment. Those which perform badly will be required to pay penalties.

Decisions will have to be made by all organisations covered by the Scheme as to who will be responsible for complying with the Scheme, how compliance will be achieved and to which accounts the costs of compliance will be charged. Dealing with the recycling payments, penalties for poor performance and the cost of the complying with the Scheme has prompted most discussion in connection with the landlord and tenant relationship.

Who pays - landlord or tenant?

The CRC Order does not deal with how the Scheme is to be dealt with between landlords and tenants. The official guidance advises that compliance is the responsibility of the undertaking which is responsible for the supply (broadly who receives the supply and is liable to pay for it). "Government will not allow the transfer of responsibility for energy supply from landlord to its tenant and vice versa".

Establishing who pays should be straightforward enough in buildings which are wholly let to tenants who pay the bills. Less straightforward is the situation where responsibility for paying the bill lies with the landlords either for the whole of the leased premises or for just the common parts in multi-let properties, with the tenants footing the bill for their individual unit.

The issues which will have to be considered by landlords and tenants include:

  • Will existing leases entitle landlords to pass on the costs of purchasing allowances for energy consumption to their tenants? Can landlords recover that cost under the banner of service charge and can tenants resist paying through the service charge?
  • Should tenants receive a share of any recycling payment and / or be called upon to contribute towards any penalty payable for poor performance. How would such a share/ contribution be calculated?
  • If a landlord chooses to avoid the difficulty and expense of charging the tenants for allowances and reimbursing them with a proportion of any recycling payment, what happens when they come to sell the property and an incoming landlord who is also part of the Scheme expects to see the expense covered off in the leases?
  • If landlords do seek to vary existing leases and to grant new leases to deal with the CRC Scheme, what happens (should they sell on to a non CRC landlord) to any recycling payment still in the pot or credited to the pot for the period during which the CRC landlord owned the property?
  • Should landlords be taking active measures now to ensure that their tenants use energy efficiently? Should landlords be carrying out works to improve the energy efficiency of buildings to make the property a more attractive investment?

Those negotiating new leases will have to take CRC into account. They may not qualify for CRC now, but landlords must bear in mind that they may qualify at a future date - the Scheme is here for over 20 years and possibly more. They may also sell to a CRC participant in the future who will expect to see leases dealing with CRC. Tenants must also consider what expenses they should be held liable for and how they should benefit from any recycling payments.

Conclusion

The British Property Federation has carried out a consultation on the CRC Scheme. It is looking to establish an industry wide policy for implementation of the Scheme but any such policy will not be prescriptive or definitive. Those entering new or negotiating the variation of existing leases, refurbishing or developing premises or considering past or future investments must now take cognisance of the Scheme and factor it into their budgets. If you require any further advice on how the CRC Scheme may affect you please contact your usual Brodies contact.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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